U-M endowment sixth-largest among colleges and universities in survey

By Mary Jo Frank
Public Affairs

U-M’s $6 billion endowment now is the sixth-largest among 842 U.S. colleges and universities surveyed by the National Association of College and University Business Officers (NACUBO) and the Commonfund. The university moved up one place for fiscal year 2009 in the annual rankings and maintained its position as the second-largest endowment among public universities.

University endowments lost an average 18.7 percent, according to study results announced Jan. 28. Although U-M’s endowment declined 20.7 percent between FY 2008 and FY 2009, its 10-year annual investment return on the endowment was 9 percent, more than double the average annual investment return of 4 percent for universities during the past 10 years.

Chief Investment Officer Erik Lundberg says because U-M has a different investment mix than many institutions its performance will differ from the average endowment year to year and is expected to be better over a longer period of time.

U-M’s investment performance puts it in the upper end of the top quartile of all endowments for both the past five- and 10-year periods, as reported by Cambridge Associates, an investment consulting firm that serves colleges, universities and large institutional investors.

The endowment is a collection of funds invested to provide a stable source of support to the university in perpetuity. Each year, a portion of the payout of the investment is made available to support activities designated by the donors of the funds, preserving the principal so that it will continue to provide steady income in future years.

U-M limits its distributions for operating purposes to 5 percent of the endowment’s average market value calculated over the previous seven years, instead of a one- to three-year market value, which has been more common at other universities. The longer time frame reduces the effect of market volatility on the endowment and distributions, and assures a dependable revenue stream.

Despite market fluctuations, distributions from the endowment have been steadily increasing because of the U-M’s conservative seven-year spending rule.

The endowment provides about 5 percent of the university’s operating budget. In the past five years, U-M has distributed $1 billion from the endowment to support university operations and anticipates distributing more in FY 2010 than it did in FY 2009, despite the recent recession.

“The conservative spending rule has become a model for other universities and colleges,” Lundberg says.

The U-M endowment is a collection of about 7,000 separate funds, each of which provides support for specific purposes such as scholarships, educational programs or professorships. Approximately one-fifth of U-M’s endowment — $1.15 billion — is earmarked for student scholarships and fellowships. Financial aid awards from those endowed funds totaled $69.8 million in 2008-09.

The top five universities based on endowment size are Harvard ($25.7 billion), Yale University, ($16.3 billion), Stanford University ($12.6 billion), Princeton University ($12.6 billion) and the University of Texas System ($12.2 billion).

NACUBO represents more than 2,500 colleges, universities, and higher education service providers across the country and around the world. The nonprofit Commonfund manages university investments.